Nexen Generates Solid Second Quarter Financial Results

  • Quarterly cash flow of $3.32 per share, driven by high commodity prices
  • Quarterly earnings of $1.11 per share
  • Latest Aspen development well on stream in July, Aspen field now producing about 30,000 equivalent barrels per day
  • Block 51 development underway
  • Long Lake Synthetic Crude Oil project on schedule and on budget

                                         Three Months               Six Months
                                         Ended June 30             Ended June 30
                                        ---------------           ---------------
        (Cdn$ millions)                  2004     2003             2004     2003
        Production (mboe/d)(1)
          Before Royalties               240       280             249       272
          After Royalties                167       195             172       186
        Net Sales                        779       726           1,522     1,532
        Cash Flow from Operations(2)     428       452             845     1,015
          Per Common Share ($/share)    3.32      3.53            6.57      7.96
        Net Income                       143       263             335       514
          Per Common Share ($/share)    1.11      2.05            2.60      4.00
        Capital Expenditures             348       318             691       811
        Net Debt(3)                    1,553     2,206           1,553     2,206
        Average Cdn$/US$ exchange
         rate                          $0.74     $0.69           $0.75     $0.67
        (1) 2003 production includes 9 mboe/d before royalties (7 mboe/d after
            royalties) for Canadian production sold in September 2003
        (2) For reconciliation of this non-GAAP measure, see Cash Flow from
            Operations on pg. 6
        (3) Including preferred and subordinated securities
    Nexen had another quarter of strong earnings and cash flow. This was driven by high commodity prices and attractive margins, offset by a stronger Canadian dollar and lower production in Yemen, the US Gulf of Mexico and Canada.

    Our cash flow and earnings were impacted by a reduced contribution by marketing during the quarter. This largely reflects the accounting treatment of natural gas storage positions held by our marketing group. Accounting rules require that losses on financial positions which offset natural gas in storage be expensed during the quarter, while the gains on these inventory positions are not recognized until the gas is withdrawn from storage. At quarter-end, we had unrecognized gains of $21 million on the 20 billion cubic feet of natural gas held in storage.

    As approved by our shareholders in May, our stock option plan converted to a tandem option plan. In the second quarter, we recognized a one-time non-cash expense of $54 million (after tax) on the conversion of this plan.

    Operating costs increased 14% to $6.06 per boe compared to the second quarter of 2003 due to higher water-handling and disposal costs, coupled with increased maintenance and workover activity in Yemen; and lower production and unplanned maintenance offshore Australia. We expect operating costs to decrease in the second half of the year as we add new production in the Gulf of Mexico. Although operating costs increased in the second quarter, we continue to expect to deliver 10% growth in cash flow per year, between 2002 and 2004, assuming constant prices and volumes.

    "If oil prices average US$30 per barrel and natural gas prices average US$4.25 per mmbtu during the second half of the year, we expect cash flow for the year of approximately $1.7 billion, and a modest increase in our net debt," commented Charlie Fischer, Nexen's President and Chief Executive Officer. "At current prices, we expect to further reduce our debt this year. This is important as we continue to develop our Long Lake Synthetic Crude Oil project."

    Second Quarter Production

                                     Production                 Production
                                  before Royalties            after Royalties
        Crude Oil, NGLs and   ------------------------   ------------------------
        Natural Gas (mboe/d)     Q2 2004    Q1 2004         Q2 2004    Q1 2004
        Yemen                      106        114              54         54
        Canada                      61         62              48         49
        United States               48         55              42         47
        Other Countries              8          9               7          8
        Syncrude                    17         18              16         18
        Total                      240        258             167        176

    Yemen produced 106,100 bbls/d in the second quarter of 2004. Production was impacted by declines and lower than expected productivity from wells drilled this year. An additional service rig will be added to the program in order to meet the demands of ongoing field maintenance.

    Offshore Australia, the Buffalo field was shut-in May 28th because of damage to a production vessel. This field will be brought back on stream in late July. This will restore over 3,000 bbls/d of production until the facilities are decommissioned in November this year.

    The Gulf of Mexico produced 48,100 boe/d in the second quarter. Incremental oil production from new wells at Gunnison was offset by lower oil production at Aspen where increased water production from Aspen-1 affected volumes. We plan to remediate this well later this summer to reduce water production. Natural gas production was impacted by base declines at Vermilion 76 in the shallow-water and the sanding-off of a high rate well at Gunnison in early May. The Gunnison well had been performing above expectation and was scheduled for re-completion in the fourth quarter of 2004. It will now be re-completed in July. Our business plan on the shelf is to exploit mature assets. Historically, we have offset base declines through drilling. The timing of our shelf drilling program prevented this until late in the second quarter.

    Our current production in the Gulf of Mexico is approximately 63,000 boe/d following the tie-in of an updip development well at Aspen and the tie-in of successful development wells at West Cameron 170, Vermilion 302, and Gunnison. In the second half, we will see further increases in our shallow-water production from drilling at Vermilion 76, Vermilion 302 and re-completions at West Cameron 170. In the deep water, we will work-over Aspen-1 to reduce water production and at Gunnison, we will tie-in the final three development wells and re-complete the shut-in well. We continue to expect the Gulf of Mexico to exit the year producing at approximately 75,000 boe/d.

    "Current corporate production is over 250,000 boe/d and the second half of the year will see our overall production grow," said Fischer. "However, factoring in second quarter results for the Gulf of Mexico and Yemen, we will likely be at or slightly below the lower end of our guidance range of 255,000 to 275,000 boe/d for the full year."

    Yemen - East Al Hajr (Block 51) Development Underway

    Development of our BAK-A field on East Al Hajr (Block 51) in Yemen is on schedule to commence early production in late 2004. To date, 16 of the 17 planned development wells have been drilled. The final one will be drilled in the third quarter. Contracts are currently being awarded for construction of the central processing facility, gathering system, and pipeline tieback to our Masila export system. Pipeline construction began last month. Full production from BAK-A is expected to commence during the second quarter of 2005 at 25,000 bbls/d. We have an 87.5% interest in East Al Hajr.

    One exploration well was drilled on Block 51 during the quarter. The well will be tested at a future date. We plan to drill five additional independent prospects this year with the next exploration well to start drilling early in the third quarter.

    Athabasca Oil Sands - Long Lake Synthetic Crude Oil Project on Track

    Our Long Lake Synthetic Crude Oil project remains on schedule and on budget. We have focussed on purchasing major equipment, materials and services; developing detailed schedules; site clearing and civil engineering work; and completing detailed engineering work.

    Flint Infrastructure Services Ltd. and Ledcor Projects Inc. are the prime construction contractors for the project. To date, over 80% of the major equipment for the steam-assisted-gravity-drainage (SAGD) production facilities and over 45% of the equipment for the upgrader have been purchased. Site clearing has been completed and rough grading is underway. Drilling of 65 SAGD well pairs for the project will start in the third quarter of 2004. Fabrication of the more than 700 equipment modules required by the project begins in the fourth quarter, with on-site mechanical work commencing in the first quarter of 2005.

    The Long Lake project will develop and upgrade bitumen into a high- quality, light, sweet, premium synthetic crude (PSC) oil. SAGD bitumen production is expected to commence in 2006, with 60,000 bbls/d of upgraded PSC oil production (30,000 net to Nexen) beginning in 2007. This project is the first phase in the development of our bitumen assets at Long Lake.

    "Long Lake is a key part of our strategy to developing a stable, high value production base in North America," explained Fischer.

    Gulf of Mexico Exploration

    We expect to drill a number of high-potential exploration wells in the Gulf of Mexico in the second half of the year. These include prospects at Crested Butte, three miles northwest of our Aspen field; Anduin in the Mississippi Canyon; and a deep-shelf test at Main Pass 240. We are finalizing our technical evaluation of a number of additional deep-shelf gas prospects and expect to begin drilling four or more of these before year-end.

    "All of these prospects are exciting opportunities, featuring relatively short-cycle times from discovery to production," said Fischer.

    In March, we acquired a 13.34% interest in the Tobago prospect. Tobago is located in 7,500 feet of water on Alaminos Canyon Block 859 and the east half of Block 858, between the Great White and Trident discoveries. The discovery well, which has been temporarily plugged and abandoned, encountered 50 feet of net pay. We expect Tobago to be part of a future Alaminos Canyon regional development.

    West Africa Exploration

    Offshore Nigeria, the Usan West-1 exploration well located on OPL-222 commenced drilling on May 17th. This well is four miles west of the main Usan field and is testing a separate structure. Results are expected during the third quarter. We anticipate two additional wells will be drilled on the block this year. We are working with our partners to finalize a field development plan for Usan by year-end.

    On OML-115, we will spud our Ameena prospect in mid-August, and if successful, we will move the rig and drill an appraisal well. Ameena is in 125 feet of water, approximately 40 miles offshore Nigeria.

    On Block K, offshore Equatorial Guinea, we plan to drill two exploration prospects which are on trend with recent commercial discoveries directly to the northeast. The first well is expected to spud in September.

    Quarterly Dividend

    The Board of Directors has declared the regular quarterly dividend of $0.10 per common share payable October 1, 2004 to shareholders of record on September 10, 2004.

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